Abstract We evaluate the hypothesis that investors seek portfolios display attractive return distributions in terms of Prospect Theory (PT). consider mutual fund market U.S. as an interesting testbed because are known to be return-chasing and about a half households own funds. Using monthly flow data from 1999–2019, we find funds attract higher net flows when they have better PT values. obtain ...

We present a descriptive model of choice with normative foundations based on how the brain is thought to represent value. An individual’s behavior is fully described by two primitives: an individual’s expectation and one free parameter we call “predisposition”. The model captures the same apparent preference phenomena illustrated by Prospect Theory but unlike Prospect Theory accounts for indivi...

Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after ...

According to prospect-refuge theory, humans prefer environments that afford protection from threat (refuge), but also provide large fields of view (prospect). Prospect-refuge theory in the past has traditionally only been applied to humans, but many of the same contingencies governing spatial preference ought to also hold true in animals. The focus of this study was to examine if this phenomena...

In this paper, I present a marriage decision mechanism and apply the concepts of prospect theory to explain the marriage entry and exit choices of individuals. I derive several results regarding relationship choices under uncertainty. The theoretical setup demonstrates why prospect theory predicts a higher number of active relationships than expected utility theory, even if the relationship is ...

It is well-known that if the parties in a legal dispute agree about the likelihood of potential trial outcomes then they will be inclined to settle vs. going to trial in order to reduce litigation costs and risk. In this paper, we assume that both plaintiff and defendant evaluate this decision in accordance with Cumulative Prospect Theory. It is found that the two parties will sometimes be unab...

In preventative health decisions, such as the decision to undergo an invasive screening test or treatment, people may be deterred from selecting the test because its perceived disutility relative to not testing is greater than the utility associated with prevention of possible disease. The prospect theory editing operation, by which a decision maker’s reference point is determined, can have imp...

Most articles that discuss the economics of security focus on the use of rational choice decision models for evaluating investment alternatives. However, security investment decisions involve risk and several researchers have noted that risk related decisions often violate the fundamental principles of rational choice decision models. Accordingly, we assert that problems exist with using these ...

The standard theory of optimal income taxation under uncertainty has been developed under the assumption that individuals maximize expected utility. However, prospect theory has now been established as an alternative model of individual behaviour, with empirical support. This paper explores the theory of optimal income taxation under uncertainty when individuals behave according to the tenets o...

This paper pits neoclassical theory against prospect theory by investigating several clean tests of the competing hypotheses. Consistent with previous work, the field experimental data suggest that prospect theory adequately organizes behavior among inexperienced consumers, whereas consumers with intense market experience behave largely in accordance with neoclassical predictions. The data indi...